The international trading system is not perfect, but as we have said so many times, freer trade is better than no trade and tariffs are, typically, the worst solution to trade issues between countries. Yes, reciprocal tariffs are fair game, that is, if you impose a tariff on us, we impose a tariff on you. But this is not what happened on April 2. On April 2, the Trump administration implemented a formula to calculate what they call ‘reciprocal’ tariffs but are NOT reciprocal tariffs. The formula is the following: if the U.S. has a, let’s say, $10 billion deficit in goods with another country, Country A, while importing $20 billion from that country, then $10/$20 = 50%. Thus, the Trump administration halves that percentage to 25% and imposes that percentage as the new tariff level for this country. That new tariff is added on top of any other tariffs imposed before against that country and/or any other sectoral tariffs applied to, like automobiles, automobile parts, steel, aluminum, etc.
Just as an example. According to the U.S. International Trade Administration webpage, Japanese tariffs for all products imported into Japan are about 4.3%, but the Trump administration has applied a tariff of 24% on Japanese imports. The European Union got hit with a 20% tariff but according to the World Trade Organization, the average tariffs to import into the EU is 5%.
If our calculations are correct, today’s effective tariffs of 3.8% will probably increase by more than 20 percentage points, the highest tariff rate since the early 1900s. Of course, since we typically try to see the glass half full rather than half empty, we still expect that calmer minds will prevail, but this is not a guarantee. If these tariff rates hold, we estimate that it will cost an American family about $5,600 per year more than what it is paying today for everyday goods. Of course, this assumes that American families don’t substitute away from buying some of these products. But the fact that the administration has imposed a tariff of 10% on all the countries of the world means that some of these costs will be unavoidable. That is, a typical American family would have to pay, at least, about $2,500 more per year for the goods it buys. Hopefully, this knowledge will give an opportunity to negotiate lower tariffs.
The biggest problem today is that this calculation does not include a new round of retaliatory tariffs, which could bring this calculation much higher before it goes lower again. Today, the Chinese government said that they would match the 34% tariff imposed on Chinese imports with a 34% tariff on exports from the U.S. to China. Furthermore, China is banning 11 U.S. companies from doing business in China.
It is very difficult to envision a US economy that does not react negatively to what has been happening. First were consumers, who have indicated, in every opportunity they have had, that they are not happy with what is happening. Now, our guess is that the recent increase in uncertainty, plus Wednesday’s decision on tariffs, will amplify businesses’ concerns regarding the future of the U.S. economy.
For these reasons we have made further downward adjustments to economic growth, as well as upward adjustments to inflation and the rate of unemployment for this year. Although we still are not projecting a recession, the probability of a recession has continued to increase. At the same time, we increased the number of rate cuts during this year from two to three 25 basis points cuts. Please see the forecast table below.
The Case for Stagflation, Revisited
For those of you who follow this publication regularly you know how adamant we have been in rejecting any notion of ‘stagflation’ since the recovery from the Pandemic recession. One of the reasons why the word stagflation is used so often is because it is catchy, for one, and two, it reminds many old timers (i.e., one of us) of the difficult environment lived during the 70s and early 1980s. In fact, just two weeks ago (see Weekly Economics for March 21, 2025) we vehemently argued that the U.S. economy was not about to enter stagflationary environment. We are still in that camp today, but after Wednesday’s tariff decisions, we cannot be so sure any longer.
Our argument two weeks ago was that the U.S. economy would have to slow down to a rate of growth of about 1.0% of GDP or below for several years while inflation would have to increase past 5% and the rate of unemployment would have to increase past 5% to 6%.
This week’s actions by the Trump administration are probably going to test our certainty even though we still believe that the Federal Reserve’s monetary policy tool kit today is better prepared to deal with current inflation and growth risks.
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Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the
U.S. dollar gains "strength" when compared to other currencies.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index(PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
